Reverse mortgages can be good source of money for elderly homeowners

All of us who own stocks or stock funds are moaning and groaning about the 3-year-old bear market. But there’s another group of sufferers: fixed-income investors, many of them elderly.

True, falling interest rates did push bond prices up last year. But many investors who owned bonds that matured or were called early saw their incomes plummet after they reinvested.

Today, you’re lucky to make 2 or 3 percent on bank savings. If you’re replacing a 10-year Treasury bond that just matured, your yield is dropping from 6.3 percent to 3.7 percent.

Is there a way a senior can make up the income gap?

One alternative: a reverse mortgage, a way to pull money out of your home without saddling yourself with monthly payments, as you would with a home equity loan.

While reverse mortgages are not suitable for everyone, low interest rates and rising home prices make them particularly attractive right now for those who can stomach the high up-front fees and compounding interest charges.

A 75-year-old who owns a $150,000 home could get a reverse-mortgage loan for nearly $98,000 today, compared to $84,000 when rates were 1 percentage point higher a year ago, for example.

Like an ordinary mortgage, a reverse mortgage is a loan. Instead of requiring monthly payments, the loan, plus interest, is repaid when the owner chooses – or when the property is sold during the owner’s lifetime or after his or her death.

Since there are no payments, you don’t need a job or other income to qualify for a reverse mortgage. An applicant must use the property as a primary residence and must be at least 62 years old, though older homeowners can get larger loans.

If the home is sold after you die, your heirs will receive any money that’s left once the debt, including interest, is paid. (Contrary to popular belief, the lender does not get the home.) If your heirs prefer, they can pay off the loan rather than sell the property.

Homeowners can take their loans as a lump sum, a fixed monthly income or a line of credit they can draw against whenever they wish. There is no income tax, since the money is a loan rather than income.

The longer you have the loan, the more interest you would owe. But federal regulations limit the total amount owed to the value of the property. If the property value falls or if the homeowner lives to be very old, interest charges or money received on the monthly payment plan can exceed the property’s value.

That, of course, is a risk that worries lenders. To reduce this prospect, they limit the initial loan amount, considering factors such as interest rates and the homeowner’s life expectancy. (If you have a previous loan on the property, a portion of the reverse mortgage must be used to pay that off.)

Hence, the older you are, the more money you can get. A 62-year-old with a $150,000 home might get $83,000, while an 85-year-old could get $113,000.

In the same way, lower interest rates allow homeowners to lock in much larger loan amounts than they can get when rates are high. Once this loan amount is set, it is permanent, even if interest rates rise later. So it might pay to lock in now, while rates are low.

The interest charges applied to the loan float, changing either once a month or once a year. Typically, they are based on the rate paid by one-year Treasury notes, plus a “margin” of 1.5 percent or 2.1 percent, depending on whether the borrower chooses the monthly or annual adjustment. Currently, the combined rate on monthly adjustments, chosen by most borrowers, is 2.8 percent.

Although the homeowner doesn’t make payments on the loan, low interest rates mean interest charges don’t build up as much, so there’s more money left for the homeowner or heirs after the loan is paid off.